Raising venture capital can be a major challenge for any fledgling company - you need to be sure of a sizeable profit and have an awareness of who you're pitching to, and why they should back you, writes JOHN COLLINS.
VENTURE CAPITALISTS are not known for their modesty. Given the risks they take when investing in early-stage companies, and the tough decisions they have to make on whether to continue to back fledgling companies, some entrepreneurs feel they have hearts of stone.
So it's a little unexpected when Dermot Berkery, one of the VC partners with leading Irish firm Delta Partners, and author of recently published Raising Venture Capital for the Serious Entrepreneur, jokes that his book was an exercise in satisfying his ego.
Far from being an exercise in vanity, the how-to guide for entrepreneurs, which covers everything from how VCs structure financing to what they look for in a business plan, has been published by heavyweight McGraw Hill and is getting a major push in the US.
Berkery, who has backed successful Irish technology firms including Similarity Systems and Farran Technology, sat down with Innovation magazine recently and imparted some tips for start-ups looking to raise cash.
KNOW WHO YOU ARE PITCHING TO
"We spend all of our time asking questions," says Berkery. "You can imagine the kinds of questions we would be asking - what's your background, what's the size of the market, who do you know? What people rarely do is the opposite. They never sit there and ask: What is the audience here? The audience is investors. What exactly do they want?"
USE YOUR NETWORK
"On the whole, it's people we know [that VCs invest in]. If you walked in off the street and we didn't know you, there would be an intensive process to find out who this guy John Collins is. What has he done? Who knows him? How do we check him out? It's great if you know somebody who knows us - or even better if we know you directly. I don't think we've ever invested in something that's come in cold through the door. It just doesn't happen."
TRY AND GET EXPERIENCE ON YOUR TEAM
"The ideal is someone who has done it before, because it's a massively complex process of doing one of these start-ups. Guys who have done it once can just cut through the crap so fast. They know what's a [waste of time] meeting with IBM versus what's a real meeting that's going to lead to something.
It's a brutal seven years doing something like this. You get paid below market salary. The thing could go bust at any particular minute. You have staff that have to be fed every month. It's a very stressful seven years or so.
"Ninety per cent of entrepreneurs in Ireland are first-timers, unlike Silicon Valley where folks are doing it for the second or third time."
HAVE BIG AMBITIONS
"We want the chance of making 10 times our money back from our investment. And as well as that, our fund is a €100 million fund. If someone says we only want €200,000 out of €100 million, how many investments is that? It's just totally unmanageable. In reality nothing ever requires just a couple of hundred grand. Everything takes €10 million, minimum.
"We require [10 times our money] and that's often where problems start. You might laugh, but we will blow our brains out on about one- third of our investments, go sideways or make our money back on maybe another third, and our aim is to give 2.5 times the money back to our investors. The ones that do well, you have to get back eight times or 10 times your money."
KNOW WHAT INVESTORS ARE LOOKING FOR
"People walk into us and they don't know what you are about. The reality is that every one is dying to invest. It's not that they don't want to . . . but it's to find the right properties to invest in and so there is a massive gap between the two.
"When the conversation starts, it's 100 per cent us asking them questions and they don't really appreciate what they have to prove to us. They need to prove they can get 10 times back. The business needs to have a chance of being worth €200 million minimum. They also don't realise what we are looking for is a really sharp angle, as opposed to something that is 'pretty good' along multiple dimensions. It has to be 10 times better than the alternatives because if it isn't, then you will never get customers to change."
LISTEN TO YOUR GUT INSTINCT
"Not every deal is a good deal. If you don't like the guys, you shouldn't do it - it's as simple as that. If you feel, when the times are tough, they are not going to support you, don't do it. In fact, if the terms are better from someone else but you just feel uncomfortable with them, don't do it because there are so many points where the parties can screw each other.
"You want to feel this guy is a decent guy and, when the chips are down, he'll play reasonably fair."
